What types of investments will I see from Menlo Atherton Capital Partners?

What are some real estate investment advantages?

Real estate has consistently produced higher returns with a lower risk profile when compared to other asset classes.

Better Returns, Lower Risk

See the risk and returns across major asset classes in the last two decades.

Why do we Charge a due diligence fee?

“Due Diligence Fee” is a misnomer and used as shorthand for all that the managers of the Investment Company do to find and lock down a property. It is important for investors to understand what the investment company does to acquire a property. In essence, it is compensation for work performed in finding and offering a property of quality to investors. Many steps, however, are required throughout this process.

1. We first must study a geographic area on a continual basis to determine the quality of the market, job growth, industry trends, and investment by the state, county and city agencies. Furthermore, they must ascertain if the market is still viable for upward growth—i.e., is it still an emerging market capable of providing top quality results?

2. We managers must study the market for multi-family assets within that geographic area to determine if there are viable assets that may be coming to market. It may take reviewing financials for dozens of properties in order to find 6-10 that warrant a deeper dive and further study.

3. The investment company must continually meet and assess brokers to determine who has the best sellers and assets, the ability to negotiate a good deal, and who actually works regularly in the geographic market as well as in the desired size and class market. Multi-family assets range from Class A properties in Class A neighborhoods down to Class D properties in Class D neighborhoods (these are referred to as Class “Don’t”). We operate in Class B properties in Class B or C neighborhoods for one type of asset (often called “Momentum Plays” because the momentum of the market moves them up in value if there is good job and industry growth), and in Class C properties (or B-) in Class B neighborhoods. The latter is the type we can get into contract on through astute negotiations, with built-in equity from the beginning, and with great upside potential. Due to our investment skills and excellent team and contractor crews, we can turn these properties around just like a corporate turnaround expert does (called “Value Plays).

Finding brokers who can actually bring deals is both an art and a science. It takes quite a bit of work to develop a relationship in which the property does not even become a “pocket listing”, but is exclusively given to one buyer. This is the goal of all our hard work.

4. We must assess at a high level the dozens of possible property deals and winnow it down to 6 to 10, as stated above. Once that half dozen or so are identified, three or so are selected for a more in-depth analysis. In the final cut, one is chosen for a deep analysis and review of all the documents we can get from the broker and owner. Between the broker, the owner, the records provided, the preliminary discussions with potential lenders, and other analyses which must be done far in advance of any letter of intent (LOI) or offer, this deeper analysis can take a long time!

5. Negotiations then must occur between Menlo Atherton Capital Partners as potential buyer and the current owner. We prepare an LOI, having analyzed all pertinent information available based on substantial underwriting spreadsheet with analytical guidelines we structured for our own company. The LOI is then presented to the broker and the dance begins.

6. We have discussions with some of our investors to determine if this property is interesting to them.

7. If the LOI is signed by the owner, we undertake a wide variety of due diligence. We first walk the property, “mystery shop it” the management company by having our people pose as prospective tenants. We perform lease audits, bank audits, contracts audits, have an inspector examine and report back on every unit, get deferred maintenance schedules, work with contractors of all types—roof, plumbing, HVAC, soil, buildings, electrical, etc.— all to find out if the deal makes sense.

8. If the asset appears to be viable, and without an actual decision yet, we must start a dialog with potential lenders to find the best deals out there at the moment. We must apply for and qualify for a loan in the millions of dollars. You can imagine how detailed that is, and it completely relies on Menlo Atherton Capital Partners’ past record and a personal guarantee from the founders. We put ourselves and our personal assets up to detailed scrutiny from the banks. It requires many meetings and conversations as well as a giant amount of paperwork.

9. We need to work with our in-house property managers to determine how best to manage this potential property and how much “re-managing” needs to be done.

10. We need to fly out and do a few site visits to walk the property to look for flaws and search for creative ways to improve the property.

12. We work with syndication lawyers who create all of our legal documents for the offering and obtain the SEC offering exemption. We also work with business attorneys who finalize the business structures and ownership packages.

13. We hire a surveyor, title company and appraiser to verify the owner’s claims and obtain insurance quotes.

14. We re-analyze all relevant information and decide whether or not to take the risk of executing a contract, knowing we will have to go hard (NON- Refundable) with possibly hundreds of thousands of dollars advanced by the managers to secure the deal.

15. When the contractor and other inspections come in, we may need to re-negotiate for reductions or credits to the contract.

16. If for some reason the deal does not go forward, we lose the money which has gone non-refundable, tens to hundreds of thousands of dollars of our personal funds.

This is only a recap of what the investment company does long before investors are on the scene and for which our compensation is 2% of the purchase price. This amount pays expenses, wages and manager compensation if there funds remaining after paying for the aforementioned expenses. We call this “Due Diligence” or “Acquisition Fee,” but it encompasses far more than what we can put on a spreadsheet or in simple words. It can take six or more months, hundreds of phone calls and emails, meetings and paperwork. And in the end we might lose thousands of dollars and end up with no asset. This is why and for what we get compensated the 2% “fee”. When we do land a good property for our investors. We believe “fee” is an inadequate word to describe the compensation for services we provide. However, that is the industry term for it, so it’s what we use.

Why is investing in a multifamily syndication better than a REIT?

REIT dividends have steadily declined over the past few years and are expected to continue their slide throughout 2017 with some rebounding in 2018.

REITs have been the beneficiaries of tremendous cap rate compression since the cycle bottom in 2008. Thus most analysts feel the risk/reward profile for REITs looks unfavorable given the maturity of the current real estate cycle. Conversely, forcing appreciation on a property helps protect against value decreases due to cap rate decompression.

For our syndications we typically offer investors an 8% preferred return and 75% of all returns in excess of 8% (most/all of which is tax-free to the investor). Capital gains can also be tax-deferred by rolling over profits into another property via a 1031 exchange. REITs do not come close to matching those types of returns.

MAD only takes on projects with an expected cash on cash return in excess of 10% and an IRR in excess of 15% – again, these returns will be mostly/completely tax-free to the investor.

REIT dividends are fully-taxed as ordinary income whereas syndication returns are typically 100% tax-free to the investor.

As a limited partner with class A shares, you will have some say in how the property is operated.

You cannot 1031 exchange REIT shares or dividends for real property or more REIT shares.

REIT valuations are influenced by the broader stock market and are thus often punished unfairly when the stock market declines.

Even if the base rates of return were equal, the tax advantages alone would make multifamily syndication investment far superior to that of any REIT.

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Does Menlo Atherton Capital Partners invest in these investments?

Menlo Atherton Capital Partners invests at least $100,000 dollars in each deal. We believe this is consistent with our philosphy of aligning our goals with our investors’ goals.

What types of fees do we collect?

Investment structure and fees vary on a deal by deal basis but typically are:

25% of the capital gains upon sale of the property.

2% due diligence fee payable at the time of purchase – based on purchase price.

1% loan guarantee fee. This is a fee paid at the time of purchase and is based on the loan amount. It is paid to our loan sponsor whose liquidity and net worth is used to obtain the best price and terms from the sellers and lenders.

If a loan refinance results in a return of 75% or more of investor capital MAD receives a 1% fee based on the original loan amount.

Investors receive a preferred cash on cash return of 8% (non-cumulative). All returns generated by the property in excess of 8% are split 25% MAD/75% Investors. We anticipate these distributions will be tax-deferred meaning investors will receive a K1 showing $0 or a loss.

Who can invest in our deals?

Anyone interested in their financial future and has $25,000 dollars.

How do investors get paid?

Cash flows from rents, parking fees, laundry services, etc. will be distributed monthly to investors. The original investment plus capital gains will be distributed immediately upon refinance or sale.

How is documentation handled?

When an investment is initially shared for review, you will be able to browse the draft documents at that time or as soon as they are made available. All signatures will be executed electronically with a fully-executed electronic version both emailed to you as well as a copy kept in your investor dashboard.

Is there an exit strategy if I need to cash out an investment?

We will always do our very best to satisfy the needs of each investor. To that end, we will offer your equity position to our other investors.

TERMINOLOGY

What is a real estate syndication?

Real Estate Syndication is simply a partnership to purchase Real Estate. These partnerships can be anything from small joint ventures between 2 investors, all the way up to SEC regulated securities among dozens or hundreds of investors.

One common format for syndications is the LLLP, or, Limited Liability Limited Partnership. This format features three common elements:

A general, or managing partner, who is responsible for managing the asset and providing information about the asset to the

limited partners, who are typically passive investors in the project.

Their losses are limited to their investment in the project.

Some investors want to participate in syndications to diversify their equity across different properties and asset classes. Some investors are looking to pool their money with others in order to purchase an asset larger than they could obtain on their own. Others still are looking to invest some of their money in real estate but don’t have the knowledge, experience, or desire to do it alone.

De minimis safe harbor election for rehab expenses

In 2013 the IRS released a new regulation which allowed for the immediate expensing of amounts of $500 or less spent for work which can be categorized as 1) a beterment 2) a restoration or 3) an adaptation to a new or different use. Previously all such expenses would need to be capitalized.

In 2016 the IRS increased the amount of this deduction to $2500. And for investors using a CPA prepared Applicable Financial Statement, the amount increases to $5000 per invoice or per line item on an invoice. One additional aspect of these regulations is that the deducted expense cannot improve or replace more than 30% of a system or component. For example, if you were to spend $5000 to replace the air conditioner on a single family home, you would need to depreciate this $5000 expense rather than take 100% of it as an expense in the current tax year. By contrast, if you were to spend $5000 to replace the entire air conditioner for one unit in a five unit apartment building, you would have only impacted 20% of the building’s air conditioning system. You would then be allowed to immediately expense the entire $5000.

Cost-segregated depreciation

Cost segregation is a highly beneficial and widely accepted tax planning strategy utilized by commercial real estate owners and tenants to accelerate depreciation deductions, defer tax, and improve cash flow. Once used only by big-4 type accounting firms and the nation’s largest real estate owners, this practice has now become routine for commercial property owners of almost every size.
A Cost Segregation Study (CSS) is based on a detailed engineering-based analysis which is then used to support the acceleration of depreciation deductions by identifying costs which can be allocated to shorter recovery periods; primarily 5, 7, and 15-year, as opposed to 27.5 (residential rental) or 39-year (commercial).

1031 Exchange

DEFINITION of ‘Section 1031’
A section of the U.S. Internal Revenue Service Code that allows investors to defer capital gains taxes on any exchange of like-kind properties for business or investment purposes. Taxes on capital gains are not charged on the sale of a property if the money is being used to purchase another property – the payment of tax is deferred until property is sold with no re-investment.

BREAKING DOWN ‘Section 1031’
The idea behind this section of the tax code is that when an individual or a business sells a property to buy another, no economic gain has been achieved. There has simply been a transfer from one property to another. For example, if a real estate investor sells an apartment building to buy another one, he or she will not be charged tax on any gains he or she made on the original apartment building. When the investor sells the original apartment building and purchases a new one, the value used from the original to buy the new one has not changed – the only thing that has changed is where the value is being held.

Read more: Section 1031

De minimis safe harbor election for rehab expenses

In 2013 the IRS released a new regulation which allowed for the immediate expensing of amounts of $500 or less spent for work which can be categorized as 1) a beterment 2) a restoration or 3) an adaptation to a new or different use. Previously all such expenses would need to be capitalized.

In 2016 the IRS increased the amount of this deduction to $2500. And for investors using a CPA prepared Applicable Financial Statement, the amount increases to $5000 per invoice or per line item on an invoice. One additional aspect of these regulations is that the deducted expense cannot improve or replace more than 30% of a system or component. For example, if you were to spend $5000 to replace the air conditioner on a single family home, you would need to depreciate this $5000 expense rather than take 100% of it as an expense in the current tax year. By contrast, if you were to spend $5000 to replace the entire air conditioner for one unit in a five unit apartment building, you would have only impacted 20% of the building’s air conditioning system. You would then be allowed to immediately expense the entire $5000.

Cost-segregated depreciation

Cost segregation is a highly beneficial and widely accepted tax planning strategy utilized by commercial real estate owners and tenants to accelerate depreciation deductions, defer tax, and improve cash flow. Once used only by big-4 type accounting firms and the nation’s largest real estate owners, this practice has now become routine for commercial property owners of almost every size.
A Cost Segregation Study (CSS) is based on a detailed engineering-based analysis which is then used to support the acceleration of depreciation deductions by identifying costs which can be allocated to shorter recovery periods; primarily 5, 7, and 15-year, as opposed to 27.5 (residential rental) or 39-year (commercial).

INVESTING WITH YOUR IRA

What is a real estate IRA?

A a real estate IRA is technically an ordinary self-directed IRA which is not significantly different than any other IRA, however a self-directed IRA is unique because of the investment options available and the investing direction comes from you. Many IRA custodians only allow investing in stocks, bonds, mutual funds and CDs. A self-directed IRA custodian allows those types of investments in addition to real estate, notes, private placements, tax lien certificates and much more

TAX FORM 1099-DIV

What is a Form 1099-DIV?

IRS Form 1099-DIV is sent to investors annually and provides the tax character of any distributions (dividends and any other distributions) paid to you during the tax year.

Why have I received a Form 1099-DIV?

You received a Form 1099-DIV because you received distributions from one or more of your investments in an eREIT. To enable you to properly report these distributions to the IRS, the Form 1099-DIV shows the tax character of the distributions you received. The eREIT who sent you a distribution is identified in the box in the top-left of the form.

TAX FORM K-1

What is a K-1?

A K-1 is a tax form used by partnerships to provide investors with detailed information on their share of a partnership’s taxable income. Partnerships are generally not subject to federal or state income tax, but instead issue a K-1 to each investor to report his or her share of the partnership’s income, gains, losses, deductions and credits. The K-1s are provided to investors on an annual basis so that each investor can include K-1 amounts on his or her tax return.

Will I receive a K-1 for my MAD investment?

Depending on which investments you own in your portfolio, you may receive a Schedule K-1, K-1 information, or substitute K-1 (hereafter collectively referred to as K-1), a Form 1099-DIV or both. If part of your MAD portfolio is allocated to one or more of the eFunds, you will receive a K-1. For more information, please see the relevant MAD Offering Circulars at menloathertondevelopments.com/oc.

When will K-1s be available to investors?

Our goal is to finalize all K-1s by March 15th, however, the eFunds may rely on outside reporting, or require additional time to furnish the forms in a way that is to the investor’s best advantage. Accordingly, you may be required to obtain one or more extensions for filing federal, state and local tax returns.

Where do I report the information contained in my K-1?

For federal tax purposes, the information provided to each investor on his or her K-1 is then included on the investor’s federal tax return. Typically, an investor must also file state tax returns in the states in which the eFund owns real property. In some cases, a composite tax filing may eliminate the need for an investor to file at the state level. Please consult with your tax advisor for more information.

How does a K-1 differ from a Form 1099-DIV?

Generally, investors that receive a Form 1099-DIV recognize dividend income equal to cash distributions received. Ordinary dividends are typically treated as ordinary income for tax purposes. When an investor receives a K-1, he or she will recognize their portion of the taxable income from the partnership but typically will not pay tax on their cash distributions. The taxable income allocated to each investor may include ordinary income, dividend income, interest income, rental real estate income, or otherwise. This income retains the same character as it had in the partnership, and should be reported on each investor’s federal tax return. Please consult your tax advisor for additional information.

Do I need to mail in my K-1 to the IRS?

No. Each eFund will submit a Form 1065 to the IRS that will include a copy of each individual investor’s K-1.

If an eFund suffers a loss, can I claim that loss as a deduction on my individual tax return? What is my tax basis in my investment in the eFund?

Generally, the capital account reflected on your K-1 should approximate your tax basis in your investment. Your capital account is computed based on your initial investment(s) in an eFund plus any allocable net income, less any net losses and/or cash distributions as reflected on your K-1. It is recommended that you keep your own running record of your cost basis in each eFund for tax purposes as there are certain instances where your tax basis may differ from your capital account balance. For additional details on how to calculate your basis, please consult your tax advisor.